Diasporas and foreign direct investment in china and india

Diasporas and Foreign Direct Investment in China and India

This book offers a comparative and historical analysis of foreign direct
investment (FDI) liberalization in China and India and explains how the
return of these countries’ diasporas affects such liberalization. It examines diasporic investment from Western FDIs and finds that diasporas,
rather than Western nations, have fueled globalization in the two Asian
giants. In China, diasporas contributed the lion’s share of FDI inflows. In
India, returned diasporas were bridges for, and initiators of, Western
investment at home. Min Ye illustrates that diasporic entrepreneurs
helped to build China into the world’s manufacturing powerhouse and
that Indian diasporas facilitated their homeland’s success in software
services development.
Min Ye is an assistant professor of international relations and the
director of the East Asian Studies Program at Boston University. She
has served as a visiting scholar and professor in China, Japan, South
Korea, Singapore, and India and has given lectures at Fudan University,
Zhejiang University, and the Chinese University of Broadcasting and
Mass Media. Her publications include The Making of Northeast Asia
(with Kent Calder, 2010) and various articles published in such journals
as the Journal of East Asian Studies, Modern China Studies, and China
Public Affairs Quarterly. In China, Ye also serves as a consultant on
globalization for private and state-run companies and development of
special zones in various localities.



Diasporas and Foreign Direct Investment
in China and India

MIN YE
Boston University


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© Min Ye 2014
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First published 2014
Printed in the United States of America
A catalog record for this publication is available from the British Library.
Library of Congress Cataloging in Publication Data
Ye, Min, 1975–
Diasporas and foreign direct investment in China and India / Min Ye.
pages cm
ISBN 978-1-107-05419-6 (hardback)
1. Investments, Foreign – China. 2. Investments, Foreign – India. I. Title.
HG5782.Y425 2014
332.670 30951–dc23
2013048109
ISBN

978-1-107-05419-6 Hardback

Cambridge University Press has no responsibility for the persistence or accuracy of
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and does not guarantee that any content on such Web sites is, or will remain,
accurate or appropriate.


To my parents
Ye Jianxin and Xia Aiyu
for the lives they live and the life they gave me



Contents

List of Illustrations
List of Abbreviations
Preface

page ix
xi
xiii

part i. introduction and theory
1.

2.

Foreign Direct Investment in China and India
Diasporas and Social Network Theory

FDI and FDI Policies in China and India
Political Theories of FDI Liberalization
Chapter Outlines

3
4
7
12
18

Social Network Theory: Diasporas, Domestic Industry,
and the Diffusion of FDI Liberalization
SNT as a New Policy Framework
Social Networks and Diffusion of FDI Liberalization
External Networks and Domestic Resistance
Comparative Cases and Hypothesized Explanations
Empirical Materials
Conclusion

20
22
23
28
35
39
40

part ii. reform stage i
3.

Diaspora Entrepreneurs and Diffusion of FDI Liberalization
in China
The New Government and Policy Options
The Rise of Diaspora Networks in Post-Mao China
Special Economic Zones and the Initiation of FDI Liberalization
Open Coastal Cities Overcame Challenge to FDI Liberalization
Reasserting FDI Liberalization after the Tiananmen Crisis
Conclusion

45
48
51
55
60
64
67
vii


viii

Contents

4. Deregulation without Openness in India
India Started Reform in the 1980s
Indira Gandhi’s Business Networks and Deregulation
Rajiv Gandhi’s Diaspora Networks and Their Role in Liberalization
Rajiv’s Social Networks: Why FDI Liberalization Failed to Stay
Quiet Change in India’s Government–Business Relations
Conclusion

69
70
72
79
84
89
90

part iii. reform stage ii
5. Deepening Diffusion: “Zone Fever” and SOE Reform in China
Expanding Diaspora Networks
Diaspora Investment and “Zone Fever”
SOE Reform Deepened FDI Liberalization
Conclusion
6. Indian Indigenous Industry and FDI
Continual Divergence in FDI between China and India
Crisis, Reform, and Blowback in India
The Evolving New Social Basis of India’s FDI Liberalization
Conclusion

95
96
99
110
117
119
120
121
132

144

part iv. foreign direct investment in sectors
7. China’s Electronics and Automobiles
The Electronics Industry: From SEZs to High-Tech Clusters
The Auto Sector: From Protectionism to Industrial Policy
FDI in Other Sectors
Conclusion

149
152
161
174
175

8. FDI Liberalization in India’s Informatics and Autos
India’s Diaspora and Informatics
Indigenous Industry and Auto Sector Liberalization
Other Sectors: Continuity or Change
Conclusion
9. Conclusion: The State, Diasporas, and Development
History and Geography, Networks, and Policies
Regime, State Autonomy, and Embeddedness
FDI and Diaspora Investment: A Missing Distinction
Diaspora Differences and Consequences across China and India
Lessons and Trends
Conclusion
Bibliography
Index

177
177
191
203
204
205
206
210
212
213
216
218
219
239


Illustrations

maps
1
2
3

Domestic Distribution of Foreign Direct Investment (FDI) Inflows
in China (2011)
page xiv
India and Regional Concentration of Foreign Direct Investment
(FDI) Inflows (2011)
xv
Foreign Direct Investment (FDI) in Automobiles and Electronics in

China and India (2011)
150

figures
1.1
2.1
2.2
2.3
3.1
3.2
4.1
5.1
5.2
6.1

Foreign Direct Investment Inflows in Comparative Perspective ($Mi)
Occurrence and Nonoccurrence of Foreign Direct Investment
Liberalization
The Diffusion Model of Foreign Direct Investment
Liberalization: Stages and Steps
Industries and Foreign Direct Investment Liberalization
China’s Diaspora Networks and Foreign Direct Investment
Liberalization, 1978–1992
Shekou Industrial Export Zone, Guangdong, January 1979
Volatile External Sectors (Share of GDP %)
Sources of Major Foreign Direct Investment (FDI) Projects in
Pudong, 1993
Diasporas’ Contributions to China’s Foreign Direct Investment
Continual Gap: Foreign Direct Investment (FDI) in China and
India ($Mi)

10
24
25
38
46
57
72
102
116
121
ix


List of Illustrations

x

6.2
6.3
6.4
6.5
8.1
8.2

Foreign Capital in India: Foreign Direct Investment (FDI) versus
Portfolio Investment ($Mi)
Economic State in Reformist India: Worsening Accounts ($Mi)
Protectionism in India: Use of Antidumping Clause (1993–2001)
The Shares of Diaspora Investment in India (%)

Differential Performance of India’s Hardware and Software Exports
The Protection of Passenger Vehicles in India, 1993–2007

124
127
130
142
189
202

tables
1.1
1.2
2.1
2.2
3.1
3.2
3.3
4.1
4.2
4.3
5.1
5.2
5.3
6.1
6.2
6.3
6.4
7.1
7.2

7.3
8.1
8.2
8.3
8.4
8.5

Ranking China and India’s Foreign Direct Investment (FDI)
Liberalization (of 141 countries)
Comparing Foreign Direct Investment (FDI) in China and India
Foreign Direct Investment (FDI) Liberalization in China and
India (1980–2010)
Cross-Time Analysis of China and India’s Foreign Direct
Investment (FDI) Liberalization
Sources of Foreign Direct Investment (FDI) in the People’s
Republic of China (PRC), 1978–1993 Combined
China’s Developmental Policy Options in 1979
Foreign Direct Investment (FDI) in the Shenzhen and Shekou
Zones in the Early Period (%)
Annual Growth Rates of Public and Private Companies in India,
1961–1996 (%)
Indira’s Pro-Business Deregulation
Rajiv Gandhi’s Economic Team and Diaspora Networks
Foreign Direct Investment (FDI) in China’s Regions by Source
(%, 1993)
Shanghai’s First Foreign Collaborations during Reform Era
[Shanghai diyi]
Major Foreign Investments in Kunshan (1992–1993)
India’s Foreign Direct Investment (FDI) Liberalization, 1991–1994
Foreign Collaborations in India: Automobiles and Electronics

Shareholding Structure of Tata Group (%, 2007)
Infosys’s Revenues by Area
The Development History of the Electronics Industry in China
The Development History of China’s Auto Sector
China’s Auto Sector Joint Ventures in the 1990s
Policy Developments in India’s Informatics Sector
Indian Software Exports in Global Markets, 1999–2000
India’s Policy Frameworks in the Auto Sector
India’s Auto Manufacturers before Reform
India’s New Automakers in the 1990s

8
12
35
37
47
49
60
71
79
80
100
104
107
123
133
138
139
153
153

168
179
184
191
193
196


Abbreviations

ACMA
AIEI
AMC
ASSOCHAM
BJP
BOP
BPO
CASI
CCP
CII
CKD
CNAIC
CPE
DOE
EEPC
EHTP
EPZ
FAW
FDI
FERA

FICCI
FIF
GIC
GM
HCL
HK
HKSE
IFC
IMF

Automotive Component Manufacturers Association of India
Association of Indian Engineering Industry
American Motors Company
Associated Chambers of Commerce and Industry of India
Bharatiya Janata Party
Balance of payments
Business process outsourcing
Center for Advanced Study of India
Chinese Communist Party
Confederation of Indian Industry
Completely knocked down
China National Automobile Industry Corporation
Comparative political economy
India’s Department of Electronics
Engineering Export Promotion Council
Electronics hardware technology parks
Export processing zones
China’s First Auto Works
Foreign direct investment
Foreign Exchange Regulations Act

Federation of Indian Chambers of Commerce and Industry
Foreign-invested firm
General Insurance Corporation
General Motors
Hindustan Computers Ltd.
Hong Kong
Hong Kong Stock Exchange
International Finance Corporation
International Monetary Fund
xi


xii

IO
IPE
IPO
IT
JV
LIC
MEI
MNC
MOFTEC
MOU
MRTP
NASSCOM
NRI
OCC
PMO
PRC

QR
RSS
SEZ
SIAM
SJM
SKD
SNT
SOE
SSI
STP
TCS
UNCTAD
UNESCAP
WTO

List of Abbreviations
International organization
International political economy
Initial public offering
Information technology
Joint venture
Life Insurance Corporation
Ministry of the Electronics Industry
Multinational corporations
Ministry of Foreign Trade and Economic Cooperation
Memorandum of understanding
Monopolies/istic and Restrictive Trade Practices Act
National Association of Software and Services Companies
Nonresident Indian
Open coastal city

Prime Minister’s Office
People’s Republic of China
Qualitative restriction system
Rashtriya Swayamsevak Sangh
Special economic zone
Society of Indian Automobile Manufacturers
Swadeshi Jagran Manch
Semi–knocked down
Social network theory
State-owned enterprises
Small-scale industry
Software technology park
Tata Consultancy Services
United Nations Conference on Trade and Development
United Nations Economic and Social Commission in Asia
and the Pacific
World Trade Organization


Preface

Confucius once said, “Fumu zai, bu yuanxing” [When parents are alive, do not
travel afar]. Generation after generation of Chinese, however, have gone to all
corners of the world to seek better lives. They left, but they kept strong emotional
and social ties to their homeland, and they returned to contribute to homeland
development. Indians also have emigrated to many places to better their livelihood.
In various historical junctures, those who left returned to play critical parts in
forging a modern India. The transformation of the economies of China and India
from socialism to capitalism, from isolationism to globalism, from backwaters of
the globe to the world’s engines of growth, has drawn on immigrant networks,

with the Chinese entrepreneurial diasporas returning to shape liberal foreign direct
investment (FDI) policies and Indian professional diasporas coming back to create
policies that have resulted in the enormous divergence in the two giants’ economic
transitions – one heavily reliant on FDI, the other domestic industry-centric.
Diasporas’ developmental impact is most effective when domestic politics is
open to their influence. When China initiated economic reform, the government
made remarkable efforts to build ties to the diaspora, provided incentives for their
return, and availed opportunity for their success in their homeland. India’s reformist leaders likewise placed diaspora professionals at key positions of apex economic
agencies. Diasporas are most developmental if they possess advanced ideas, technology, and resources. The Chinese diaspora entrepreneurs occupied key manufacturing niches in the global market. When they circulated investment home, they
made China a “world factory.” Many Indian immigrants worked at Western
multinational corporations (MNCs), connected their homeland with global funds
and technology, and supported the global success of indigenous Indian firms. In
short, diasporas are not miracle workers, but they are critical to economic miracles
in the historic renaissances of the two Asian giants and ancient civilizations.
This book began as my dissertation project at Princeton University.
Professors Lynn White, Atul Kohli, Kent Calder, and Thomas Christensen
xiii


Preface

xiv

Kazakhstan
Heilongjiang

Mongolia
Nei Mongol
Kyrgyzstan

Xinjiang
Gansu

Tajikistan

Ningxia
Qinghai

Pakistan

Shanxi

Jilin

Liaoning
Beijing
DalianNorth Korea
Tranjin
Hebei

Shaanxi
Henan

Shandong

South Korea
Japan

Jiangsu
Anhui Suzhou

Hubei Wuhan
Kunshan
Sichuan Chongqing
ZhejiangWenzhou
Hunan Jiangxi
Bhutan
2011 FDI (100 mil USD)
Guizhou
Fujian
Data Not Included
Xiamen
Yunnan
1–1200
Bangladesh
GuangxiGuangdong Taiwan
Macau
1201–1700
Hong KongShenzhen
1701–4500
Myanmar
4501–5800
Laos
Hainan

Xizang (Tibet)
Nepal

India

map 1. Domestic Distribution of Foreign Direct Investment (FDI) Inflows in China (2011)

Note: China has twenty-seven provinces and four provincial-level municipalities.
Foreign direct investment has concentrated in the coastal areas, marked in the dark
shade, making this region the export hub of the nation. These are places that had
substantial out-migration before reform and maintained strong ties to diaspora
communities overseas, particularly in Hong Kong, Macao, Taiwan, and Southeast Asia.

have provided unending guidance, support, and encouragement at Princeton
and beyond. Friends I made at Princeton continue to lift my spirits and offer
companionship in the United States and in Asia. They are Ian Chong, Chunmei
Du, Todd Hall, Scott Kastner, Ning Ma, Lanjun Xu, and Enhua Zhang. Most of
the research and writing were done in Boston. Thanks to Boston University’s
leave policies, my colleagues, and the Princeton-Harvard China and the World
Program fellowship, I was able to complete the research, write the book, and
raise a new family. At Harvard’s Fung Library, Nancy Hearst helped with
collecting key archives and statistics used in the book.
Outside the United States, I drew on expertise and collections in China,
India, Hong Kong, and Singapore while serving as a visiting scholar at the
Chinese University of Hong Kong (CUHK), the Chinese Academy of Social
Sciences, the Indian Council for Research on International Economic Relations
(ICRIER), and the National University of Singapore. Ms. Jean Hung at CUHK
availed me of the Universities Service Center’s rich collection on China’s
economic reform. In India, I am indebted to two nameless women librarians
at ICRIER and the Jawaharlal Nehru University library who compiled archives
on Indian reform.


Preface

xv
China

Afghanistan
Jammu & Kashmir
Himachal Pradesh
Punjab

Pakistan

Chandigarh

Haryana
Gurgaon
Delhi

Arunachal Pradesh

Nepal
Sikkim Bhutan

Uttar Pradesh
Rajasthan

Madhya Pradesh

Gujarat

Assam
Nagaland
Meghalaya
Bihar

Bangladesh Manipur
Tripura
West Bengal
Mizoram
Kolkata
Myanmar
Orissa

Dadra and Nagar Haveli
Mumbai (Bombay)
Maharashtra

Thailand

Hyderabad
Andhra Pradesh
Karnataka
Bangalore Chennai

2011 FDI US $ (million)
Data Not Included
10–300
301–6000
6001–9001
9000–55000 Andaman and Nicobar Islands

Pondicherry
Tamil Nadu
Kerala

Lakshadweep
Sri Lanka

map 2. India and Regional Concentration of Foreign Direct Investment (FDI) Inflows
(2011)
Note: India has twenty-eight states and seven union territories. Its private economy is
most vibrant in South India. Since the 1990s, FDI inflows in India have concentrated in
areas with strong indigenous capital such as Mumbai, Bangalore, New Delhi, Chennai,
Hyderabad, and the state of Gujarat. Diaspora networks seem to facilitate FDI inflows in
Gujarat, Andhra Pradesh, and Tamil Nadu, but not in West Bengal or Kerala.

Over the long years, the project has benefited from advice offered by
Thomas Berger, Susan Eckstein, Joseph Fewsmith, Kevin Gallagher, and
Williams Grimes at Boston University (BU); Iain Johnston, Tarun Khanna,
William Kirby, and Liz Perry at Harvard; and Yongnian Zheng at the
National University of Singapore and Devesh Kapur at the University of
Pennsylvania.


xvi

Preface

At Cambridge University Press, I am thankful for senior editor Lew
Bateman’s interest in acquiring the manuscript and supervision of the review
process. I also deeply appreciate Shaun Vigil for guidance throughout the
production and the two anonymous reviewers of the manuscript for their comments to improve the book. My research assistants at BU, Sarah Chung, Joshua
Lacey, and Damin Zhu, have helped with maps, figures, and statistics used in the
book. Best wishes for their careers after BU.
A book project, in the midst of a ticking tenure clock, can be stressful, yet the

births of my two daughters, Claire and Sophia (who inevitably delayed the
project’s completion), somehow made the long process a hopeful and enjoyable
journey filled with laughter. My husband Yunrong Chai, a microbiologist, has
played a central part in balancing my career and family life. An academic
profession ultimately requires persistence and deep commitment, for which I
am grateful to my parents who endured the havoc under Mao’s rule, experienced
dramatic change during reform, and still carry on with unyielding morality,
discipline, gratitude, and a strong sense to serve their family and community. To
them, I dedicate this book.


part i
INTRODUCTION AND THEORY



1
Foreign Direct Investment in China and India

In late 1978, when Deng Xiaoping became the leader of the People’s Republic of
China (PRC), the country embarked on a persistent, and at times turbulent,
course of capitalist economic reform. Foreign capital, once shunned in the
country, was embraced. At about the same time in India (1980), Indira Gandhi
launched a less noticed yet equally significant shift away from socialism toward
capitalism. Foreign capital, however, was largely avoided in India until the
1990s. Even then, India’s liberalization of foreign direct investment (FDI) was
contested and remained constrained. The puzzle in comparing China’s and
India’s economic reforms is not so much which one was doing better but why
their paths of liberalization were so different, with one heavily reliant on external investment and the other largely promoting indigenous business.1 To explain
this critical divergence, domestic politics or globalization seems inadequate.

Instead, actors transcending national boundaries – embedded in domestic politics yet blessed with global ties, the diasporas of these countries – have played
important roles in forging pro-FDI reform in China and pro-domestic-business
change in India.
China and India have both experienced substantial emigration for sustained
periods throughout their respective histories. And, in both countries, immigrants have circulated back financial and human capital that has helped homeland economic reforms and late industrialization, albeit in different ways. The
Chinese entrepreneurial diasporas contributed to their home country’s initiation and consolidation of FDI liberalization. The Indian professional diasporas helped influence liberal policy making in their homeland and connected
domestic business to global markets and resources. The Indian diasporas,

1

Other comparative works include Friedman and Gilley (2005), Bardhan (2010), Khanna (2007),
and Sharma (2009). There are also publications on China or India that make considerable
reference to the other country. See Huang (2008) and Panagariya (2008).

3


4

Foreign Direct Investment in China and India

however, have had less impact on FDI liberalization in India than the Chinese
diasporas have had on FDI liberalization in China. Indian indigenous industries, although welcoming international funds, technology, and expansion into
the world market, imposed more stringent terms on the entry and operation of
FDI in the country.

diasporas and social network theory
The study of diasporas’ impacts on homeland reform is a lacuna in the literature
in international and comparative political economy, and theoretical models that
neatly capture and explain diasporas’ homeland effects are lacking. To integrate

diasporas into the politics of economic reform in China and India, I develop an
interdisciplinary social network theory (SNT) that assesses policy makers’ internal and external networks (diasporas being one such network) as two explanatory variables for FDI liberalization in developing countries undergoing
economic reform. Internal networks in such countries are typically rooted in
the previous economic structure, resist new liberal policies, and thus are called
“domestic resistance.” External networks, conversely, provide new ideas and
resources necessary for FDI liberalization either directly or through domestic
conduits to policy makers. Across countries, or across time and sectors within a
country, these two variables’ relative strength influences the prospects of FDI
liberalization.
Meanwhile, the SNT posits FDI liberalization as a process of making and
implementing new policies and incorporates a diffusion model that analyzes FDI
liberalization in two stages: the initiation stage, in which external networks
influence policy makers to initiate new FDI policies, and the consolidation
stage, wherein policy makers expand FDI liberalization within the country. In
the consolidation stage, the early success of the new policy is critical because this
success helps policy makers broaden domestic support and overcome domestic
opposition. Diaspora networks help in this stage of FDI liberalization by transferring knowledge and resources to those domestic actors who generate early
success. By interacting with more domestic actors, diasporas facilitate the diffusion of FDI liberalization in their homeland. The SNT thus comprehensively
captures the determinants and effects of FDI liberalization and social interactions among various actors: the state, domestic industries, and external networks (including diasporas).
China and India both have cultural and linguistic complexities that make
understanding them and drawing common insights quite difficult. Yet such a
comparison offers opportunities to revisit core theories in economic development studies, such as how FDI affects late development, how regime types
shape economic reforms, and how states confront and leverage domestic and
external networks in the process of globalization. And, as Tony Saich (2005,
227) remarks, “[L]essons about what has worked and what has failed may
provide important learning experiences for other lesser-developed countries


Diasporas and Social Network Theory

5

striving to get out of poverty through shifting to more sustainable economic
growth.”
Foreign direct investment in China and India speaks to a long-standing
debate in the field. Some development scholars have argued against FDI
because this form of capital opens a developing economy to powerful and
profit-driven Western companies and is likely to increase the country’s vulnerability to global market forces.2 In Atul Kohli’s words (2004, 382), foreign
capital “can be a liability” because state autonomy weakens with increasing
FDI. Some globalists, conversely, have celebrated China’s FDI-reliant industrialization as a victory of globalization pursued by Western multinational
corporations (MNCs) and international organizations (IOs).3 More important, almost all debates and writings on FDI have treated such capital as
coming from Western MNCs.
The SNT melds the views on economic development and globalization and
examines both external and internal actors in shaping FDI liberalization, as well
as the effects of FDI on economic development. It finds that external actors have
indeed precipitated FDI policy changes in China and India and that the most
influential external actors in these countries are their diasporas who have
accomplished great success in advanced societies. The Chinese diasporas are
primarily entrepreneurs in East Asia, and the Indian diasporas are primarily
professionals working at Western MNCs and IOs. Furthermore, diasporas’
policy influence was achieved through interactions with policy makers and
domestic groups, transferring financial and human capital to produce early
success and thereby broadening domestic support for FDI liberalization.
Embedded in diaspora networks that possess ideas, technology, and capital,
policy makers in China and India have pursued FDI liberalization with great
success.
The diffusion analysis proffers that FDI liberalization begins with some
domestic actors adopting new policies early on, creating early success that
persuades more actors to emulate the policy. Diasporas that provide new ideas
and resources help to initiate FDI liberalization, increase the chance of early

success, and expedite the diffusion process. In the meantime, policy makers’
internally oriented networks play important yet opposite roles. Under strong
domestic resistance, FDI liberalization occurs either when external actors
strengthen or when domestic resistance weakens or both. In such cases, FDI
liberalization proceeds slowly, and crises are often needed to spur major policy
change, with domestic networks continuing to contour postcrisis policy
consolidation.
2

3

The dependency literature in post–World War II decades and the developmental state literature
from the 1980s to 1990s both argue against FDI. For more recent critiques of FDI, see Huang
(2003) and Huang (2008).
See Friedman (2005) and Gowan (1999). This stance is also expressed by IOs such as the IMF and
World Bank, as well as in publications in the Financial Times, cited in Wade (2004).


6

Foreign Direct Investment in China and India

The research finds that diaspora networks were the key drivers of FDI
liberalization in China. The impact of the Chinese diasporas existed at both
national and local levels: local officials in South China revived ties to diaspora
entrepreneurs, with whose help they designed special economic zones (SEZs).
Reformist leaders in Beijing also interacted with diaspora entrepreneurs and
were positively inclined toward opening the country’s economy. Despite strong
conservative resistance in the national government, ideas and incentives provided by wealthy diaspora entrepreneurs supported local governments’ pursuit
of FDI and enabled SEZs to achieve early success, thereby strengthening the

reformist coalition and sustaining FDI liberalization in the country. In the open
coastal cities, high-tech development zones, and reform of state-owned enterprises, diaspora entrepreneurs were the external allies of the government at the
local level, supplying capital, technology, and global commerce. The diffusion
process also reveals the importance of the Chinese state that provided domestic
opportunities to diasporas, encouraged diaspora networks to form, and relied
on diaspora resources to generate industrial success. In short, the state’s external
embeddedness, fostered by the state itself, greatly enhanced its political strength
in forging economic reform.
With regard to India, the relative strength of domestic resistance and external
networks also explains the nonoccurrence and occurrence of FDI liberalization
across time and sectors. The social network approach reveals that indigenous
private producers influenced Mrs Gandhi’s domestic deregulation in 1980. Yet
indigenous producers also constituted the domestic resistance to FDI liberalization attempted by Rajiv Gandhi in the mid-1980s. In the 1990s, Indian policy
makers were armed with liberal ideas and implemented FDI liberalization in the
aftermath of the 1991 debt crisis. Yet postcrisis policy consolidation was again
constrained by domestic resistance. Indian diasporas were primarily professionals in the West. Although supplying liberal ideas and at times bridging Indian
industry with global markets, their developmental strength was less than that of
the Chinese entrepreneurial diasporas and their effect on India’s FDI was more
limited.4 After 2000, Indian indigenous industry, facilitated by diasporas, was
transformed and developed robust external ties to Western companies; FDI
liberalization moved forward but with clear constraints.
Understanding diasporas’ central position and unpacking diaspora investment from other FDI leads to a more nuanced assessment of FDI and development. Many have argued that China’s dependence on FDI is a source of domestic
instability and have predicted large-scale nationalist backlashes against globalization.5 By contrast, India’s lesser reliance on FDI is viewed as a strength.6

4

5
6

One of the main diaspora groups is contractual laborers in the Gulf. They are quite important in

helping grassroots welfare by sending remittances. Their impact on FDI is minimal, however.
See, for example, Huang (2003) and Gallagher (2005).
See Huang and Khanna (2003).


FDI and FDI Policies in China and India

7

However, because of their shared linguistic and cultural heritage, Chinese diaspora investors tend to work with domestic political and economic actors. Their
operations in China have not roused domestic backlash and likely remain a
stabilizing force in “Greater China.”7 In India, nonethnic investors dominate
FDI. Although amounting to only a fraction of that in the PRC, FDI in India has
been more contested. If nationalism does engender domestic backlash against
FDI, it is more likely to occur in India than in China.8

fdi and fdi policies in china and india
China and India have comparable pre-reform economic-political conditions that
make their divergence in FDI liberalization puzzling. First, both had large
populations and territories, granting them similar factors of endowment
(cheap land and low labor costs). Second, India and China both had poor
infrastructure and dreadful living conditions, which discouraged Westerners
from coming to these countries.9 Third, both countries pursued socialism after
independence, although China’s Maoism was more extreme than Jawaharlal
Nehru’s system in India. Their prior institutional barriers to FDI were thus
comparable. Fourth, the two countries have venerable traditions and have
suffered from Western aggression in the modern era, making their elites intensely
nationalistic. Ideological opposition to FDI and fear of foreign imposition were
highly analogous. Despite all these similarities, FDI liberalization during their
economic transitions has been decidedly different, and FDI has played a much

stronger role in China than in India.

Contrasting FDI Liberalization in China and India
A narrow definition limits FDI liberalization to the passing of formal laws and
regulations on the entry and operation of foreign companies. In this book, FDI
liberalization is broader and refers to an economy’s increasing openness to FDI
and thus includes not only formal rules and laws but also policy implementation
and other important provisions that matter to foreign investors. This broadening
is necessary in transition economies where formal policies are often conflicting and
have yet to establish credibility with investors. Informal institutions, perceptions,
and attitudes are important supplements to and sometimes sufficient substitutes

7

8

9

“Greater China” refers to areas surrounding southern China, including Hong Kong, Macao,
Taiwan, and Southeast Asia (Naughton 1997).
Exception should be made for Japanese investment in China, which is plagued by Chinese antiJapan nationalism. Yet China’s anti-FDI backlashes are few and not caused by diaspora investment
in general.
See, for example, Joydee Mukherji, “The Causes of Differential Development,” and Subramanian
Swamy, “Chasing China,” in Friedman and Gilley (2005).